Greece - Overview of economy

The Greek economy grew significantly after World War II, but declined in
the 1970s due to poor economic policies implemented by the government.
As a result, Greece has spent much of the latter part of the 20th
century and the early 21st century trying to rebuild and strengthen the
economy. Thus, Greece is one of the least economically developed member
countries in the European Union (EU).

While the Greek government encourages free enterprise and a capitalistic
system, in some areas it still operates as a
socialist
country. For instance, in 2001 the government still controlled many
sectors of the economy through state-owned banks and industries, and its
public sector
accounted for approximately half of Greece's
gross domestic product
(GDP). Limited natural resources, high debt payments, and a low level
of industrialization have proved problematic for the Greek economy and
have prevented high economic growth in the 1990s. Certain economic
sectors are stronger and more established than others, such as shipping
and tourism, which are growing and have shown promise since the 1990s.

The Greek government took measures in the late 1980s and 1990s to reduce
the number of state-owned businesses and to revitalize the economy
through a plan of
privatization
. This policy has received support from the Greek people and political
parties of both the left and right. Despite the government's
efforts, a drop in investment and the use of economic stabilization
policies caused a slump in the Greek economy during the 1990s. In 2001,
the Greek government fully encouraged foreign investment, particularly
in its
infrastructure
projects such as highways and the Athens Metro subway system.

Soon after joining the European Union (EU), Greece became the recipient
of many
subsidies
from the EU to bolster its struggling agricultural sector and to build
public works projects. However, even with the European Union's
financial assistance, Greece's agricultural and industrial
sectors are still struggling with low productivity levels, and Greece
remains behind many of its fellow EU members.

In the late 1990s, the government reformed its economic policy to be
eligible to join the EU's single currency (the euro), which it
became part of in January 2001. Measures included cutting
Greece's
budget deficit
to below 2 percent of GDP and strengthening its
monetary policy
. As a result,
inflation
fell below 4 percent by the end of 1998—the lowest rate in 26
years—and averaged only 2.6 percent in 1999. Major challenges,
including further economic
restructuring
and the unemployment reduction, still lie ahead.

The modern Greek economy began in the late 19th century with the
adoption of social and industrial legislation, protective
tariffs
, and the creation of industrial enterprises. At the turn of the 20th
century, industry was concentrated on food processing, shipbuilding, and
the manufacturing of textile and simple consumer products. It is worth
noting that, having been under direct control of the Ottoman Empire for
over 400 years, Greece remained economically isolated from many of the
major European intellectual movements, such as the Renaissance and the
Enlightenment, as well as the beginnings of the Industrial Revolution.
Therefore Greece has had to work hard to catch up to its European
neighbors in industry and development.

By the late 1960s, Greece achieved high rates of economic growth due to
large foreign investments. However, by the mid-1970s, Greece experienced
declines in its GDP growth rate and the ratio of investment to GDP,
which caused labor costs and oil prices to rise. When Greece joined the
European community in 1981, protective economic barriers were removed.
Hoping to get back on track financially, the Greek government pursued
aggressive economic policies, which resulted in high inflation and
caused debt payment problems. To stop rising public sector deficits, the
government borrowed money heavily. In 1985, supported by a US$1.7
billion European Currency Unit (ECU) loan from the EU, the government
began a 2-year "stabilization" program with moderate
success. Inefficiency in the public sector and excessive government
spending caused the government to borrow even more money. By 1992
government debt exceeded 100 percent of Greece's GDP. Greece
became dependent on foreign borrowing to pay for its deficits, and by
the end of 1998, public sector
external debt
was at US$32 billion, with overall government debt at US$119 billion
(105.5 percent of its GDP).

By January 2001 Greece had successfully reduced its budget deficit,
controlled inflation and interest rates, and stabilized
exchange rates
to gain entrance into the European Monetary Union. Greece met the
economic requirements to be eligible to join the program of a single
currency unit (the euro) in the EU and to have the economy governed by
the European Central Bank's focused monetary policy. The Greek
government now faces the challenge of structural reform and to ensure
that its economic policies continue to enhance economic growth and
increase Greece's standard of living.

One of the recent successes of Greece's economic policies has
been the reduction of
inflation rates
. For more than 20 years, inflation remained in double digits, but a
successful plan of fiscal consolidation, wage restraint, and strong
drachma policies has lowered inflation, which fell to 2.0 percent by
mid-1999. However, high interest rates remain troublesome despite cuts
in
treasury bills
and bank rates for savings and loans institutions. Pursuing a strong
fiscal policy
, combined with public-sector borrowing and the lowering of interest
rates, has been challenging for Greece. Headway was made in 1997-99 and
rates are progressively declining in line with inflation.